Accounting for Insurers

33
Accounting for Insurers is changing. -It’s time to prepare Frukostseminarium 31 augusti, 2016

Transcript of Accounting for Insurers

Page 1: Accounting for Insurers

Accounting for Insurers is changing. -It’s time to prepareFrukostseminarium

31 augusti, 2016

Page 2: Accounting for Insurers

Agenda

Frukostseminarium 31 augusti 2016

Inledning Accounting for Insurers in Denmark Erfarenheter från projektarbete

Page 3: Accounting for Insurers

3

Document Classification: KPMG Public

© 2016 KPMG P/S, a Danish limited liability partnership and a member firm of the KPMG network of independent member firms affiliated with KPMG International Cooperative ("KPMG International"), a Swiss entity. All rights reserved.

Övergripande tidplan IFRS 4 fas 2

No earlierthan 1 january

2020

Page 4: Accounting for Insurers

4

Document Classification: KPMG Public

© 2016 KPMG P/S, a Danish limited liability partnership and a member firm of the KPMG network of independent member firms affiliated with KPMG International Cooperative ("KPMG International"), a Swiss entity. All rights reserved.

Tidslinje 2014 2015 2016 2017 2018 2020

IFRS 15

IFRS 9

IFRS 4 Overlay approach

IFRS 4 Fas 2

IFRS 4 Deferral approach

Solvens II

Dansk GAAP

Förstudie

• Utbildning• Gapanalyser• Kvantitativa analyser• Identifiera informationsgap

Design

• Redovisningsprinciper• Systemförändringar• Processförändring• Utbildning

Implementering

• Processer• System• Utveckla årsredovisning• Utbildning

Förvaltning

• Utbildning• Tolkningar• Intern kontroll mm

Accounting change InsurersIFRS 9 Slutlig

Standard

IFRS 15 Slutlig Standard

IFRS 15 Träder I kraft

Förväntad slutlig standard

IFRS 4 fas 2

Första möjliga datum för ikraftträdande av

IFRS 4 fas 2?

IFRS 9 Träder I kraft

Solvens II träder i

kraft

IFRS 9 Försäkringsbolag ?

Page 5: Accounting for Insurers

Accounting for Insurersin Denmark

Frukostseminarium 31 augusti 2016

Page 6: Accounting for Insurers

6

Document Classification: KPMG Public

© 2016 KPMG P/S, a Danish limited liability partnership and a member firm of the KPMG network of independent member firms affiliated with KPMG International Cooperative ("KPMG International"), a Swiss entity. All rights reserved.

Background Basic thinking behind the new regulation What is the effect of changes in DK GAAP Challenges in implementation How to prepare for the changes

Agenda

Page 7: Accounting for Insurers

7

Document Classification: KPMG Public

© 2016 KPMG P/S, a Danish limited liability partnership and a member firm of the KPMG network of independent member firms affiliated with KPMG International Cooperative ("KPMG International"), a Swiss entity. All rights reserved.

Accounting – background - DenmarkHistorical transition— Mid 1990’ies – Market value valuation on assets — Mid 1990’ies – Rules on distribution of results between policyholders and owners (participating contracts)— 2000 – Risk based reporting – ”Traffic light”- system based on loss absorption of market risk— 2004 – Accounting Practice based on a ”Fair value through Profit and loss” for assets (IFRS) and liabilities

(adaption of 1999 discussion paper from IASB on IFRS for insurance contracts)— 2007 – Introduction of a risk based additional capital requirement (Internal Solvency Requirement (ISB)) (”Solvency

1.5”)— 2014 – Standard formula approach for ISB— 2016 – Accounting Practice based on S II (and IFRS 4

phase 2) and implementation of S II in DK regulationGeneral trends over time in the market— Life insurance – Focus on ALM – ”flight from guaranteed

products” and hedging of residual risks— General insurance – Focus on ALM – reduction of market risk

and focus on (profitability in) insurance risks

Page 8: Accounting for Insurers

8

Document Classification: KPMG Public

© 2016 KPMG P/S, a Danish limited liability partnership and a member firm of the KPMG network of independent member firms affiliated with KPMG International Cooperative ("KPMG International"), a Swiss entity. All rights reserved.

“One set of accounts” – approach— Focus on “fair value” over a longer timespan – focus has been increasing since 2004 and onwards— The Danish Market has over time adopted accounting standards “one set of accounts” used ”for all purposes”:

— the DFSA and the industry has jointly tried to merge/align all stakeholder requirements into a single framework

Tax filings based on

Tax filings:- taxable income is based

on accounting principles

Regulatory filing

Regulatory Reporting- has been based on

supplementary details to the public Annual report

Company Registrar filings

Annual Reports- is published through the

Registrar’s web page (CVR)

Background - Denmark

Annual or quarterly reports

”DK accounting regulation based on

IFRS”

Page 9: Accounting for Insurers

9

Document Classification: KPMG Public

© 2016 KPMG P/S, a Danish limited liability partnership and a member firm of the KPMG network of independent member firms affiliated with KPMG International Cooperative ("KPMG International"), a Swiss entity. All rights reserved.

Insurance contracts – common provisionsThe Danish statutory order on Financial reportingGeneral application— Building Block Approach (BBA) is the general rule for

valuation of insurance liabilities— Discounting required and on a current basis— Prescribed discounting interest rate curve (EIOPA

(including VA adjustment or match principle) or methodology producing a similar result)

— Simplification (Premium Allocation Approach (PAA)) allowed for (non life) insurance contracts with - short duration risk covers (1 year or less) or - when the results do not deviate significantly from the

building block approach— “Profit margin” (“contractual service margin”) only allowed

in Own Funds under Solvency II under the BBA— Risk Margin included in valuation of insurance liabilities

Reinsurance— Valuation of ceded reinsurance contracts

based on actual contracts and expected contracts (management actions) corresponding to the period covered by insurance contracts

Contract boundary— Contract boundary is defined as the point in

time when the insurer is bound by to pay future insurance events- Corresponding to Solvency II regulation

Disclosure— A “simplified” version similar to current IFRS standard

adjusted for the relevant additions of- Profit margin (CSM)- Risk margin

With specific requirements to detailed disclosure on the underlying portfolios (insurance and investments)

”Net present value of best

estimate of future cash flows”

”Risk margin”

”Profit margin”

Page 10: Accounting for Insurers

10

Document Classification: KPMG Public

© 2016 KPMG P/S, a Danish limited liability partnership and a member firm of the KPMG network of independent member firms affiliated with KPMG International Cooperative ("KPMG International"), a Swiss entity. All rights reserved.

Contract boundaries – Solvency II basis in DK GAAP

Contract bound

Contract is bound

— Issuance of new insurance contract (or binding offer)

— Issuance of a renewal of existing policy (written premium “invoicing”)

Riskperiodbegin

Beginning of risk coverage

— Start of cover under the insurance contract

Paymentreceived

Customer payment received

— Payment of new or existing premiums

Paymentreceived

Customer payment received

— Payment of instalment premiums

Riskperiodends

Paymentreceived

Customer payment received

— Payment of instalment premiums

Contract boundary under Solvency II (and DK GAAP)

Contract boundary under IFRS 4 Phase 2

Page 11: Accounting for Insurers

11

Document Classification: KPMG Public

© 2016 KPMG P/S, a Danish limited liability partnership and a member firm of the KPMG network of independent member firms affiliated with KPMG International Cooperative ("KPMG International"), a Swiss entity. All rights reserved.

Insurance contract valuation principle— pre-coverage (“Premium”) liability is the present value of the best estimate of the all relevant cash flows (Building

block approach (BBA))— Cash flows, Discounting, Risk Margin & Contractual Service Margin — Interest rate curve based on EIOPA curves (Possibility for matching adjustment or volatility adjustment)

0

10

20

30

40

50

60

70

80

90

100

Building block approach - BBA

”Net present value of best

estimate of future cash flows”

”Risk margin”

”Profit margin”

Page 12: Accounting for Insurers

12

Document Classification: KPMG Public

© 2016 KPMG P/S, a Danish limited liability partnership and a member firm of the KPMG network of independent member firms affiliated with KPMG International Cooperative ("KPMG International"), a Swiss entity. All rights reserved.

Life insurance – valuation of liabilities (BBA)Best estimate of cash in and out flows including Guaranteed benefits are valued taking all options available to policyholders and companies into considerationBest estimate of cash in and out flows are determined using— A model simulating all possible outcomes, or— A similar equivalent analytical or numerical

methodology, which incorporate variables influencing the relevant cash flows, applying a probability weighted sufficient number of realistic scenarios for the development in relevant risks and/or variables, or

— A residual valuation based on fair value of dedicated assets- Stringent rules for calculation of guaranteed (and

partly guaranteed) benefitsUnit linked covers are valued at underlying assets after separation of all options and insurance elements

Few life and pension companies have developed “models simulating all possible outcomes”, most operate with models calculating— Life and disability probability and/or— Probability of surrender and/or paid-up policy status

FDBFFO

(Dedicated) assets at fair value 100 RMNet Present Value of future Premiums (FP) 20 "FY*"

+ 120

Net Present Value of best estimate of guaranteed benefits (GB) 80NPV of (partly) guaranteed benefits ("FY*") 15Risk Margins (RM) 5Net Present Value of expected future profits (FFO) 10

- 110Value of Future Discretionary Bonus (FDB) 10

FP

Asse

ts

Liab

ility

for g

uara

ntee

d be

nefit

s (G

B)

Page 13: Accounting for Insurers

13

Document Classification: KPMG Public

© 2016 KPMG P/S, a Danish limited liability partnership and a member firm of the KPMG network of independent member firms affiliated with KPMG International Cooperative ("KPMG International"), a Swiss entity. All rights reserved.

Simplified approach - PAASimplification (Premium Allocation Approach (PAA)) allowed for (non life) insurance contracts— Similar approach as applied under current IFRS 4— Risk margin shall be considered when evaluating

liability adequacy (onerous contracts)— Premiums used for calculation of the provision can be

net of acquisition costs relating to the insurance contracts

Experience so far— Most of the large insurance companies (listed) use

BBA— Small(er) (and well consolidated) non-life insurers are

expected to use the PAA simplification, asIt is a prerequisite, that companies using the PPA method do not calculate and include Profit margin in the capital base for solvency purposes

Page 14: Accounting for Insurers

14

Document Classification: KPMG Public

© 2016 KPMG P/S, a Danish limited liability partnership and a member firm of the KPMG network of independent member firms affiliated with KPMG International Cooperative ("KPMG International"), a Swiss entity. All rights reserved.

Risk marginIFRS Exposure Draft on Insurance Contracts define the Risk Adjustment (Risk Margin) as— The compensation that an entity requires for bearing

the uncertainty about the amount and timing of the cash flows that arise as the entity fulfils the insurance contract

DK statutory order on financial reporting define the Risk Margin as— … the amount, that the company is expected to pay

another insurance company to take the risk that the cost of settling the company's non-life insurance contracts may be different from the best estimate …

The intention is to allow the use of Solvency II principle of CoC as well as other methods— Most Danish Insurance companies are expected to use

Solvency II methods

SCR flow chartSolvensbehov

97.045.772

Operationel risiko BasissolvensbehovRisikobegrændende

foranstaltninger46.456 96.999.316 0

Marked Modpart Skade Sundhed

43.616 6.527 96.947.741 2.680.749

SCR flow chartSolvensbehov

97.045.772

Operationel risiko BasissolvensbehovRisikobegrændende

foranstaltninger46.456 96.999.316 0

Marked Modpart Skade Sundhed

43.616 6.527 96.947.741 2.680.749

SCR flow chartSolvensbehov

97.045.772

Operationel risiko BasissolvensbehovRisikobegrændende

foranstaltninger46.456 96.999.316 0

Marked Modpart Skade Sundhed

43.616 6.527 96.947.741 2.680.749

Run-off of insurance liabilities

Page 15: Accounting for Insurers

15

Document Classification: KPMG Public

© 2016 KPMG P/S, a Danish limited liability partnership and a member firm of the KPMG network of independent member firms affiliated with KPMG International Cooperative ("KPMG International"), a Swiss entity. All rights reserved.

Mio. kr.1st half

20151st half

2016SKADEFORSIKRINGBruttopræmier 5.714 5.632Afgivne forsikringspræmier -449 -436Ændring i præmiehensættelser -1.313 -1.268Ændring i fortjenstmargen og risikomargen 149 100Ændring i genforsikringsandel af præmiehensættelser 104 122Præmieindtægter f.e.r. 4.206 4.150Udbetalte bruttoerstatninger -3.172 -3.179Modtaget genforsikringsdækning 269 181Ændring i erstatningshensættelser 117 175Ændring i risikomargen -6 -20Ændring i genforsikringsandel af erstatningshensættelser -23 59Erstatningsudgifter f.e.r. -2.816 -2.784Bonus og præmierabatter -27 -28Erhvervelsesomkostninger -475 -488Administrationsomkostninger -234 -248Provisioner og gevinstandele fra genforsikringsselskaber 46 39

Forsikringsmæssige driftsomkostninger f.e.r., i alt -662 -696TEKNISK RESULTAT AF SKADEFORSIKRING 701 642

Disclosure of profit and loss – example Disclosure of Revenue has not been aligned to the coming IFRS for Insurance contracts— Continuing disclosure of “written premium” (including

new definition of contract boundary)

— Change in profit- and risk margin shown in a separate line under Premium income- Change in Risk margin relating to pre-coverage

liability (Premium liability) is included as premium income

- Changes exclude financial effects from discounting, change in discounting and time value of money

— Change in Risk margin relating to Claims liabilities shown in a separate line under Claims expenses

Page 16: Accounting for Insurers

16

Document Classification: KPMG Public

© 2016 KPMG P/S, a Danish limited liability partnership and a member firm of the KPMG network of independent member firms affiliated with KPMG International Cooperative ("KPMG International"), a Swiss entity. All rights reserved.

Disclosure of profit and loss – example (continued)Disclosure of Financial effects from the Insurance contracts is separated and disclosed under investments:— Measured on a current basis ie. no “lock-in” of interest

rates- Danish GAAP requires FVTPL as overriding

principle as the business model requires risk management on a fair value basis

— No requirement to disclose the underlying components e.g. change in time value of money, change in discounting etc.- However, to separate and disclose the change in

the underlying elements discounting shall be performed on each element in the BBA separately

Mio. kr.1st half

20151st half

2016IKKE-FORSIKRINGSTEKNISK VIRKSOMHED

Teknisk resultat af skadeforsikring 701 642Teknisk resultat af livsforsikring 6 -14Indtægter fra associerede virksomheder 55 17Indtægter af investeringsejendomme 55 40Renteindtægter og udbytter m.v. 1.207 950Kursreguleringer 164 141Renteudgifter -36 -44Omkostninger i.f.m. investeringsvirksomhed -33 -29Investeringsafkast, i alt 1.412 1.074Forrentning og kursregulering af skadeforsikringshensættelser 125 -448Investeringsafkast overført til livsforsikringsvirksomhed -1.386 -470Andre indtægter 9 10Andre omkostninger -25 -31RESULTAT FØR SKAT 842 763Skat -191 -169PERIODENS RESULTAT 651 594

Page 17: Accounting for Insurers

17

Document Classification: KPMG Public

© 2016 KPMG P/S, a Danish limited liability partnership and a member firm of the KPMG network of independent member firms affiliated with KPMG International Cooperative ("KPMG International"), a Swiss entity. All rights reserved.

Disclosure of the BBA-components— CSM – “Fortjenst margen”

separate for Non-life and life & pension

— Risk margin explicit for Non-life and implicit for life &pension

Balance sheet – example –Topdanmark – 2nd quarter 2016

Page 18: Accounting for Insurers

What is the effect of changes in DK GAAP

Page 19: Accounting for Insurers

19

Document Classification: KPMG Public

© 2016 KPMG P/S, a Danish limited liability partnership and a member firm of the KPMG network of independent member firms affiliated with KPMG International Cooperative ("KPMG International"), a Swiss entity. All rights reserved.

The changes in the executive order has been treated as change in accounting practice for— Non-life insurance:

- Introduction of new contract boundary- Risk Margin- Change in definition of best estimate (if any…)- Future expected profits- Change in discounting rates (divided between some considering it a change in accounting estimates and rest

taking it as change in accounting policy)— Life and pensions insurance

- Risk products have been treated as Non-life insurance- Separation of Future expected profits (was included in collective and individual bonus potentials previously – ie.

not all view this as a change in accounting policy)- Changes in assumptions on options & guarantees, risk margin etc. have been viewed as change in accounting

estimates

Change in accounting policies 2016

Page 20: Accounting for Insurers

Challenges in implementation

Page 21: Accounting for Insurers

21

Document Classification: KPMG Public

© 2016 KPMG P/S, a Danish limited liability partnership and a member firm of the KPMG network of independent member firms affiliated with KPMG International Cooperative ("KPMG International"), a Swiss entity. All rights reserved.

Major challenges in life insurance— Valuation of life & pension liabilities

- Best estimate – estimation techniques and decision of impact of management actions - Major decisions (and discussions) about product understanding – reach of guarantee issued in instances with

guarantee depending on a specified - Documentation and argumentation for parameter setting- Product changes (from guaranteed products towards market value based products)

— System support for the calculation of and setting of parameters to be used in determining the cash flows- Most Danish life insurers have been forced to introduce new calculation systems- All have been struggling to meet dead lines set for delivering 1st quarter results and “Day one” reporting under

Solvency II— Data management and availability

- All companies have been working with Solvency II requirements - A (large) number of companies have chosen to update core systems during the period of preparing for the

Solvency II (and new financial reporting)

Challenges – implementing the new accounting standard

Page 22: Accounting for Insurers

22

Document Classification: KPMG Public

© 2016 KPMG P/S, a Danish limited liability partnership and a member firm of the KPMG network of independent member firms affiliated with KPMG International Cooperative ("KPMG International"), a Swiss entity. All rights reserved.

Major challenges in non-life insurance— Contract boundary

- Defining and capture of insurance contracts when bound – tacit renewals in private and small commercial lines— Valuation of insurance liabilities

- Best estimate – estimation techniques and contract boundaries- Documentation and argumentation for parameter setting

— Profit margin- Documentation and level of documentation- Definition of costs to be included and the definition of portfolios (LOBs (“similar risks” versus “Managed together”)- Documentation of model results and back testing – new products etc.

— Reinsurance and contract boundaries- Use of management actions for gross business with a longer duration than underlying reinsurance

— System support for the calculation of and setting of parameters to be used in determining the cash flows- Not all Danish non-life insurers have systems backing the calculation of cash flows

— Data management and availability- All companies have been working with Solvency II requirements - Not all have finalised a systematic and systems supported approach

Challenges – implementing the new accounting standard

Page 23: Accounting for Insurers

Did we achieve our stated goal of one set of accounts

Page 24: Accounting for Insurers

24

Document Classification: KPMG Public

© 2016 KPMG P/S, a Danish limited liability partnership and a member firm of the KPMG network of independent member firms affiliated with KPMG International Cooperative ("KPMG International"), a Swiss entity. All rights reserved.

… merging of requirements 1. January 2016Stated purpose for the joint taskforce between DFSA and the Insurance Industry

— Obtain maximum alignment to Solvency II valuation requirements — Maintain alignment to (the known versions of) IFRS (drafts)

— Have a clear and unambiguous accounting standard

The outcome is a continuing uniform basis – however, there will be differences going forward— Measure in accordance with IFRS

- When IFRS prescribe fair value, or- When IFRS has an option for applying fair value

— If IFRS prohibit fair value – S II requires revaluation to fair valueThere is a growing feeling in the Danish market that the idea of an unified approach to “one set of accounts” is not going to last in the future

Page 25: Accounting for Insurers

How to prepare for the changes

Page 26: Accounting for Insurers

26

Document Classification: KPMG Public

© 2016 KPMG P/S, a Danish limited liability partnership and a member firm of the KPMG network of independent member firms affiliated with KPMG International Cooperative ("KPMG International"), a Swiss entity. All rights reserved.

Apply the experiences from the Solvency II balance sheet and valuation modelsBut be aware of the differences between the two “standards”:— Definition of portfolios— Contract boundaries— Risk margin calculation— Discounting rates – and the treatment of financial effects (lock-in of interest rates on insurance contracts) — Cost definitionsand the consequences for the Contractual Service Margin (… and the effects on results)Other considerations— Product designs in respect of using PAA versus BBA

- The Danish companies have adjusted products in non-life to wordings enabling annual price adjustments whenever possible in the marked (reduction of future premiums)

— System support is critical- The amount of data to be processed make system support critical- There will be differences – ie. a clear definition of differences and tracking of those will be needed going forward

Preparation for the coming changes

Page 27: Accounting for Insurers

Erfarenheter från projektarbete IFRS 4 fas 2, IFRS 9 och IFRS 15Frukostseminarium 31 augusti 2016

Page 28: Accounting for Insurers

28

Document Classification: KPMG Public

© 2016 KPMG P/S, a Danish limited liability partnership and a member firm of the KPMG network of independent member firms affiliated with KPMG International Cooperative ("KPMG International"), a Swiss entity. All rights reserved.

IFRS 4 fas 2, erfarenheter ”General Insurance” Utvärdering om förenklingsmetoden. Premium Allocation

Approach (PAA) tillämplig för försäkringsavtal > 1 år ? Påverkan på system om förenklingsmetod inte tillämpas

Presentation i balansräkning av nuvarande ”premiereserv” kan förändras även om metod för värdering inte skiljer väsentligt från nuvarande redovisning av premiereserv

Påverkan system och processer även vid tillämpning av PAA

Skadereserver Explicita kassaflöden (”best estimate” jämfört med nuvarande principer)

Justering för risk

Redovisning av försäkringsavtal vid första redovisningstillfället Avtal hänförligt till portföljer som genererar förlust, redovisas tidigare

Definition av portfölj (Homogena riskgrupper?)

Livförsäkring Tillämpning av IFRS 15, Intäkter baserat på klassificering enligt

nuvarande principer och IFRS 4 fas 2 inklusive separation Klassificering avtal: bedömning av försäkringsrisk (vid olika

tillfällen) Diskonteringskurva (jfr marknadsränta enligt IFRS 4 fas 2 och

EIOPA-kurva)

Allmänt Senare tillämpning av IFRS 9? Affärsmodell kapitalförvaltning, kritisk för tillämpning IFRS 9 Presentation av resultaträkning och balansräkning

Premiebegrepp utgår – Intäkter från försäkringsavtal

Jämförelse med Solvens 2 (utgångspunkt) Ömsesidig verksamhet

Skuld vs. Eget kapital?

Tillämpning av metod ? (BBA) Mirroring Approach finns ej kvar

Riskmarginal och CSM

Page 29: Accounting for Insurers

29

Document Classification: KPMG Public

© 2016 KPMG P/S, a Danish limited liability partnership and a member firm of the KPMG network of independent member firms affiliated with KPMG International Cooperative ("KPMG International"), a Swiss entity. All rights reserved.

Accounting Change Insurance

Förstudie Implemen-tering

Design Förvaltning“Business as usual”

2016 2017 2018 2019 2020 2021

Förstudie ImplementeringDesign Förvaltning“Business as usual”

Förstudie ImplementeringDesign Förvaltning“Business as usual”

IFRS 9*

IFRS 4 fas 2**

*förutsätter senare tillämpning** Kombinerat med IFRS 15

IFRS 15

Page 30: Accounting for Insurers

Frågor ?

Page 31: Accounting for Insurers

31

Document Classification: KPMG Public

© 2016 KPMG P/S, a Danish limited liability partnership and a member firm of the KPMG network of independent member firms affiliated with KPMG International Cooperative ("KPMG International"), a Swiss entity. All rights reserved.

Page 32: Accounting for Insurers

Thank you

Page 33: Accounting for Insurers

Document Classification: KPMG Public

The KPMG name and logo are registered trademarks or trademarks of KPMG International.

The information contained herein is of a general nature and is not intended to address the circumstances of any particular individual or entity. Although we endeavor to provide accurate and timely information, there can be no guarantee that such information is accurate as of the date it is received or that it will continue to be accurate in the future. No one should act on such information without appropriate professional advice after a thorough examination of the particular situation.

kpmg.com/socialmedia kpmg.com/app

© 2016 KPMG P/S, a Danish limited liability partnership and a member firm of the KPMG network of independent member firms affiliated with KPMG International Cooperative ("KPMG International"), a Swiss entity. All rights reserved.